Friday, December 30, 2011

Personal Guaranty Ruled Invalid

Personal Guaranty Ruled Invalid

      In a decision rendered in early November by the Kentucky Court of Appeals, a shareholder’s personal guaranty of a corporate obligation was held invalid for failure to expressly refer to the obligation guaranteed. Brunswick Bowling & Billiards v. Margaret L. Ng-Cadlaon, No. 2010-CA-001844-MR, 2011 WL 5244971 (Ky. App. Nov. 4, 2011).

      Ng-Cadlaon was a shareholder in and officer of R&S Enterprises, d/b/a “Blue Ribbons Lane.” It financed certain equipment purchased from Brunswick via a loan from Deutsche Financial Services Corporation. Ng-Cadlaon and the other R&S shareholders personally guaranteed this debt. When R&S defaulted, Bruswick filed a complaint against both R&S and the individual guarantors. Ng-Cadlaon moved for summary judgment on the basis that the guaranty was unenforceable for failure to satisfy the requirements of KRS § 371.065.

      The guaranty at issue was not part of the obligation being guaranteed and it did not specifically recite either the maximum aggregate liability of the guarantor or the date on which the guaranty would terminate. That being the case, the statute requires that the guaranty “must expressly refer to the instrument or instruments being guaranteed in order to be enforceable.” Slip Op. at 4. The guaranty provided that it would apply to:

          One or more security agreements, including but not limited to conditional sales agreements, leases,  chattel and/or real estate mortgages, notes or other deferred or time payment paper, and any and all agreements relating to the purchases of such paper or documents (all of the foregoing hereinafter called “Security Obligations”)….   Slip Op. at 3.

While it was Brunswick’s position that there was no doubt as to the obligation Ng-Cadlaon agreed to secure, she contended that the guaranty, containing “a generalized laundry list of potential present and future obligations of varying types” (Slip Op. at 4) was insufficient to satisfy the requirements of KRS § 371.065. Rejecting Brunswick’s assertion, the Court held that:

The fact that the note at issue falls within one of the categories of obligations listed in the guaranty is insufficient in itself to constitute an express reference.  Slip Op. at 5.

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